valero energy Quarterly and Other SEC Reports 2008 1st

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period ended March 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to ______________________________

Commission file number 1-13175

VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

One Valero Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)

(210) 345-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer __ Non-accelerated filer __ Smaller reporting company __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of April 30, 2008
was 528,503,332.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

INDEX

Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007......................... 3

Consolidated Statements of Income for the Three Months
Ended March 31, 2008 and 2007 ......................................................................................... 4

Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2008 and 2007 ......................................................................................... 5

Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2008 and 2007 .................................................................. 6

Condensed Notes to Consolidated Financial Statements ........................................................ 7

Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations .............................................................................................................. 26

Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 39

Item 4. Controls and Procedures................................................................................................ 42

PART II - OTHER INFORMATION

Item 1. Legal Proceedings ......................................................................................................... 43

Item 1A. Risk Factors ................................................................................................................ 43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....................................... 44

Item 6. Exhibits.......................................................................................................................... 44

45
SIGNATURE................................................................................................................................

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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Par Value)
March 31, December 31,
2008 2007
(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments .................................................. $ 1,431 $ 2,464
Restricted cash ...................................................................................... 41 31
Receivables, net .................................................................................... 6,009 7,691
Inventories ............................................................................................ 4,643 4,184
Deferred income taxes .......................................................................... 271 247
Prepaid expenses and other................................................................... 119 175
Total current assets ............................................................................ 12,514 14,792
Property, plant and equipment, at cost..................................................... 26,289 25,787
Accumulated depreciation ....................................................................... (4,305) (4,078)
Property, plant and equipment, net ....................................................... 21,984 21,709
Intangible assets, net ................................................................................ 275 290
Goodwill .................................................................................................. 4,060 4,061
Deferred charges and other assets, net ..................................................... 1,836 1,870
Total assets ........................................................................................ $ 40,669 $ 42,722
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations........... $ 3 $ 392
Accounts payable.................................................................................. 8,635 9,596
Accrued expenses ................................................................................. 490 502
Taxes other than income taxes.............................................................. 534 632
Income taxes payable............................................................................ 202 499
Deferred income taxes .......................................................................... 293 293
Total current liabilities ...................................................................... 10,157 11,914
Long-term debt and capital lease obligations, less current portion.......... 6,471 6,470
Deferred income taxes ............................................................................. 4,008 4,021
Other long-term liabilities........................................................................ 1,801 1,810
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized;
627,501,593 and 627,501,593 shares issued ..................................... 6 6
Additional paid-in capital ..................................................................... 7,258 7,111
Treasury stock, at cost; 99,063,806 and 90,841,602 common shares... (6,574) (6,097)
Retained earnings ................................................................................. 17,110 16,914
Accumulated other comprehensive income .......................................... 432 573
Total stockholders’ equity ................................................................. 18,232 18,507
Total liabilities and stockholders’ equity .......................................... $ 40,669 $ 42,722
See Condensed Notes to Consolidated Financial Statements.

3

CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except per Share Amounts)
(Unaudited)

Three Months Ended March 31,
2008 2007

Operating revenues (1) ..................................................................... $ 27,945 $ 18,755
Costs and expenses:
Cost of sales................................................................................... 25,669 15,510
Refining operating expenses.......................................................... 1,114 934
Retail selling expenses................................................................... 188 171
General and administrative expenses............................................. 135 145
Depreciation and amortization expense......................................... 367 322
Total costs and expenses ............................................................ 27,473 17,082
Operating income.............................................................................. 472 1,673
Other income, net.............................................................................. 20 5
Interest and debt expense:
Incurred.......................................................................................... (116) (89)
Capitalized ..................................................................................... 19 31
Income from continuing operations before income tax expense....... 395 1,620
Income tax expense........................................................................... 134 532
Income from continuing operations .................................................. 261 1,088
Income from discontinued operations, net of income tax expense ... - 56
Net income ........................................................................................ $ 261 $ 1,144
Earnings per common share:
Continuing operations ................................................................... $ 0.49 $ 1.82
Discontinued operations ................................................................ - 0.09
Total ........................................................................................... $ 0.49 $ 1.91
Weighted-average common shares outstanding
(in millions) ................................................................................ 532 599
Earnings per common share – assuming dilution:
Continuing operations ................................................................... $ 0.48 $ 1.77
Discontinued operations ................................................................ - 0.09
Total ........................................................................................... $ 0.48 $ 1.86
Weighted-average common shares outstanding –
assuming dilution (in millions) .............................................. 541 615
Dividends per common share............................................................ $ 0.12 $ 0.12
Supplemental information:
(1) Includes excise taxes on sales by our U.S. retail system................... $ 194 $ 196


4

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)

2008 2007
Cash flows from operating activities:
Net income........................................................................................ $ 261 $ 1,144
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense......................................... 367 334
Stock-based compensation expense .............................................. 12 30
Deferred income tax expense ........................................................ 8 44
Changes in current assets and current liabilities............................ (11) 338
Changes in deferred charges and credits and other
operating activities, net .............................................................. ( 9) (4)
Net cash provided by operating activities .................................. 628 1,886

Cash flows from investing activities:
Capital expenditures ......................................................................... (537) (551)
Deferred turnaround and catalyst costs............................................. (103) (129)
Contingent payments in connection with acquisitions ..................... (25) (50)
Minor acquisitions and other investing activities, net ...................... (51) 7
Net cash used in investing activities .......................................... (716) (723)

Cash flows from financing activities:
Long-term note repayments .............................................................. (374) (183)
Purchase of common stock for treasury............................................ (518) (904)
Issuance of common stock in connection with
employee benefit plans .................................................................. 7 37
Benefit from tax deduction in excess of recognized stock-based
compensation cost ......................................................................... 8 63
Common stock dividends ................................................................. (64) (73)
Net cash used in financing activities .......................................... (941) (1,060)
Effect of foreign exchange rate changes on cash ................................. (4) 3
Net increase (decrease) in cash and temporary cash
(1,033) 106
investments ......................................................................................
2,464 1,590
Cash and temporary cash investments at beginning of period ......
$ 1,431 $ 1,696
Cash and temporary cash investments at end of period.................


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

2008 2007

Net income ........................................................................ $ 261 $ 1,144

Other comprehensive income (loss):
Foreign currency translation adjustment........................ (77) 20

Pension and other postretirement benefits net loss
reclassified into income, net of income tax
benefit of $0 and $1 ................................................... - 1

Net loss on derivative instruments
designated and qualifying as cash flow hedges:
Net loss arising during the period,
net of income tax benefit of $27 and $23 .......... (49) (42)
Net gain reclassified into income,
net of income tax expense of $8 and $6 ............ (15) (11)
Net loss on cash flow hedges ........................... (64) (53)

Other comprehensive loss........................................... (141) (32)

Comprehensive income..................................................... $ 120 $ 1,112


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION, PRINCIPLES OF CONSOLIDATION, AND SIGNIFICANT
ACCOUNTING POLICIES

As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation,
one or more of its consolidated subsidiaries, or all of them taken as a whole.

These unaudited consolidated financial statements include the accounts of Valero and subsidiaries in
which Valero has a controlling interest. Intercompany balances and transactions have been eliminated in
consolidation. Investments in significant non-controlled entities are accounted for using the equity
method.

These unaudited consolidated financial statements have been prepared in accordance with United States
generally accepted accounting principles (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and notes required by GAAP for complete
consolidated financial statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All such adjustments are of a normal recurring nature unless
disclosed otherwise. Financial information for the three months ended March 31, 2008 and 2007 included
in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited
consolidated financial statements. Operating results for the three months ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The consolidated balance sheet as of December 31, 2007 has been derived from the audited financial
statements as of that date. For further information, refer to the consolidated financial statements and
notes thereto included in our annual report on Form 10-K for the year ended December 31, 2007.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management
reviews its estimates based on currently available information. Changes in facts and circumstances may
result in revised estimates.

Reclassifications
Previously reported amounts have been reclassified to present the operations of the Lima Refinery as
discontinued operations as discussed in Note 3.

2. ACCOUNTING PRONOUNCEMENTS

FASB Statement No. 157
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” Statement No. 157
defines fair value, establishes a framework for measuring fair value under GAAP, and expands
disclosures about fair value measures, but does not require any new fair value measurements. Statement
No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions of Statement
No. 157 are to be applied on a prospective basis, with the exception of certain financial instruments for
which retrospective application is required. FASB Staff Position No. FAS 157-2 (FSP 157-2), issued in
February 2008, delayed the effective date of Statement No. 157 for nonfinancial assets and nonfinancial

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years beginning after November 15, 2008. We adopted
Statement No. 157 effective January 1, 2008, with the exceptions allowed under FSP 157-2, the adoption
of which has not affected our financial position or results of operations but did result in additional
required disclosures, which are provided in Note 9. The exceptions apply to the following: nonfinancial
assets and nonfinancial liabilities measured at fair value in a business combination; impaired property,
plant and equipment; goodwill; and the initial recognition of the fair value of asset retirement obligations
and restructuring costs. We do not expect any significant impact to our consolidated financial statements
when we implement Statement No. 157 for these assets and liabilities.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of FASB Statement No. 115.” Statement No. 159
permits entities to choose to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. Statement No. 159 is effective for fiscal years
beginning after November 15, 2007. We have not elected to apply the provisions of Statement No. 159 to
any of our financial instruments as of March 31, 2008; therefore, the adoption of Statement No. 159
effective January 1, 2008 has not affected our financial position or results of operations.

FASB Statement No. 141 (revised 2007)
In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations”
(Statement No. 141R). This statement improves the financial reporting of business combinations and
clarifies the accounting for these transactions. The provisions of Statement No. 141R are to be applied
prospectively to business combinations with acquisition dates on or after the beginning of an entity’s
fiscal year that begins on or after December 15, 2008, with early adoption prohibited. Due to its
application to future acquisitions, the adoption of Statement No. 141R effective January 1, 2009 will not
have any immediate effect on our financial position or results of operations.

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated
Financial Statements – an amendment of ARB No. 51.” Statement No. 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December 15, 2008. This statement
provides guidance for the accounting and reporting of noncontrolling interests, changes in controlling
interests, and the deconsolidation of subsidiaries. In addition, Statement No. 160 amends FASB
Statement No. 128, “Earnings per Share,” to specify the computation, presentation, and disclosure
requirements for earnings per share if an entity has one or more noncontrolling interests. The adoption of
Statement No. 160 effective January 1, 2009 is not expected to materially affect our financial position or
results of operations.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and
Hedging Activities.” Statement No. 161 establishes, among other things, the disclosure requirements for
derivative instruments and for hedging activities. This statement requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about contingent features related to credit risk
in derivative agreements. Statement No. 161 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after November 15, 2008. Since Statement No. 161 only affects disclosure

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requirements, the adoption of Statement No. 161 will not affect our financial position or results of
operations.

3. DISPOSITION OF LIMA REFINERY

Effective July 1, 2007, we sold our refinery in Lima, Ohio to Husky Refining Company, a wholly owned
subsidiary of Husky Energy Inc. As a result, the consolidated statement of income for the three months
ended March 31, 2007 reflects the operations related to the Lima Refinery in “income from discontinued
operations, net of income tax expense.” Financial information related to the Lima Refinery operations for
the three months ended March 31, 2007 were as follows (in millions):

Operating revenues .......................................................... $ 943
Income before income tax expense.................................. 91

4. INVENTORIES

Inventories consisted of the following (in millions):

2008 2007
Refinery feedstocks......................................................... $ 2,359 $ 1,739
Refined products and blendstocks .................................. 2,025 2,188
Convenience store merchandise...................................... 83 85
Materials and supplies..................................................... 176 172
Inventories ................................................................ $ 4,643 $ 4,184

As of March 31, 2008 and December 31, 2007, the replacement cost (market value) of LIFO inventories
exceeded their LIFO carrying amounts by approximately $7.1 billion and $6.2 billion, respectively.

5. DEBT

On February 1, 2008, we redeemed our 9.50% senior notes for $367 million, or 104.750% of stated value.
These notes had a carrying amount of $381 million on the date of redemption, resulting in a gain of
$14 million that was included in “other income, net” in the consolidated statement of income. In addition,
in March 2008, we made a scheduled debt repayment of $7 million related to certain of our other debt.

During the three months ended March 31, 2008, we had no borrowings under our revolving credit
facilities or our short-term uncommitted bank credit facilities.

6. STOCKHOLDERS’ EQUITY

Treasury Stock
During the three months ended March 31, 2008 and 2007, we purchased 8.8 million and 15.6 million
shares of our common stock at a cost of $518 million and $904 million, respectively, in connection with
the administration of our employee benefit plans and common stock purchase programs authorized by our
board of directors. During the three months ended March 31, 2008, we issued 0.6 million shares from

9


treasury at an average cost of $67.37 per share, and for the three months ended March 31, 2007, we issued
3.8 million shares from treasury at an average cost of $58.63 per share, for our employee benefit plans.

On February 28, 2008, our board of directors approved a new $3 billion common stock purchase program.
This program is in addition to the remaining amount under the $6 billion program previously authorized.
This new $3 billion program has no expiration date. As of March 31, 2008, we had made no purchases of
our common stock under the new $3 billion program.

Common Stock Dividends
On May 1, 2008, our board of directors declared a regular quarterly cash dividend of $0.15 per common
share payable on June 18, 2008 to holders of record at the close of business on May 28, 2008.

7. EARNINGS PER COMMON SHARE

Earnings per common share amounts from continuing operations were computed as follows (dollars and
shares in millions, except per share amounts):

2008 2007
Earnings per common share from continuing operations:
Income from continuing operations........................................... $ 261 $ 1,088

Weighted-average common shares outstanding ........................ 532 599

Earnings per common share from continuing operations .......... $ 0.49 $ 1.82

Earnings per common share from continuing operations –
assuming dilution:
Income from continuing operations........................................... $ 261 $ 1,088

Weighted-average common shares outstanding ........................ 532 599
Effect of dilutive securities:
Stock options.......................................................................... 8 15
Performance awards and other benefit plans.......................... 1 1
Weighted-average common shares outstanding –
assuming dilution ................................................................... 541 615

Earnings per common share from continuing operations –
assuming dilution.................................................................... $ 0.48 $ 1.77

Approximately 2 million outstanding stock options were not included in the computation of dilutive
securities for the three months ended March 31, 2008 because the options’ exercise prices were greater
than the average market price of the common shares during the reporting period, and therefore the effect
of including such options would be anti-dilutive.

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8. STATEMENTS OF CASH FLOWS

In order to determine net cash provided by operating activities, net income is adjusted by, among other
things, changes in current assets and current liabilities as follows (in millions):

2008 2007
Decrease (increase) in current assets:
Restricted cash.............................................................. $ (10) $ -
Receivables, net ............................................................ 1,663 221
Inventories .................................................................... (469) (402)
Income taxes receivable................................................ - 32
Prepaid expenses and other........................................... 47 32
Increase (decrease) in current liabilities:
Accounts payable.......................................................... (771) 115
Accrued expenses ......................................................... (82) (75)
Taxes other than income taxes...................................... (93) (7)
Income taxes payable.................................................... (296) 422
Changes in current assets and current liabilities .............. $ (11) $ 338

The above changes in current assets and current liabilities differ from changes between amounts reflected
in the applicable consolidated balance sheets for the respective periods for the following reasons:
• the amounts shown above exclude changes in cash and temporary cash investments, deferred
income taxes, and current portion of long-term debt and capital lease obligations, as well as the
effect of certain noncash investing and financing activities discussed below;
• previously accrued capital expenditures, deferred turnaround and catalyst costs, and contingent
earn-out payments are reflected in investing activities in the consolidated statements of cash
flows;
• changes in assets held for sale and liabilities related to assets held for sale related to the Lima
Refinery from December 31, 2006 to March 31, 2007 are reflected in the line item to which the
changes relate in the table above; and
• certain differences between consolidated balance sheet changes and consolidated statement of
cash flow changes reflected above result from translating foreign currency denominated amounts
at different exchange rates.

Noncash financing activities for the three months ended March 31, 2008 included the reversal of an
accrual of $158 million at December 31, 2007 for common stock purchases in the open market that were
not settled and paid until January 2008. There were no significant noncash investing activities for the
three months ended March 31, 2008.

Noncash financing activities for the three months ended March 31, 2007 included the accrual of
$137 million of common stock purchases in the open market for which settlement and payment occurred
in April 2007. There were no significant noncash investing activities for the three months ended
March 31, 2007.

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Cash flows related to the discontinued operations of the Lima Refinery have been combined with the cash
flows from continuing operations within each category in the consolidated statement of cash flows for the
three months ended March 31, 2007. Cash provided by operating activities related to our discontinued
operations was $65 million for the three months ended March 31, 2007. Cash used in investing activities
related to the Lima Refinery was $9 million for the three months ended March 31, 2007.

Cash flows related to interest and income taxes were as follows (in millions):

2008 2007
Interest paid (net of amount capitalized)......................... $ 16 $ 13
Income taxes paid (net of tax refunds received) ............. 414 5

9. FAIR VALUE MEASUREMENTS

As discussed in Note 2, we adopted Statement No. 159 effective January 1, 2008, but have not made any
fair value elections with respect to any of our eligible assets or liabilities as of March 31, 2008. Also as
discussed in Note 2, effective January 1, 2008, we adopted Statement No. 157, which defines fair value,
establishes a consistent framework for measuring fair value, establishes a fair value hierarchy (Level 1,
Level 2, or Level 3) based on the quality of inputs used to measure fair value, and expands disclosure
requirements for fair value measurements.

Pursuant to the provisions of Statement No. 157, fair values determined by Level 1 inputs utilize quoted
prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs are
based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or
liability, and include situations where there is little, if any, market activity for the asset or liability. We
use appropriate valuation techniques based on the available inputs to measure the fair values of our assets
and liabilities. When available, we measure fair value using Level 1 inputs because they generally
provide the most reliable evidence of fair value.

The table below presents information (dollars in millions) about our assets and liabilities measured at fair
value on a recurring basis and indicates the fair value hierarchy of the inputs utilized by us to determine
the fair values as of March 31, 2008. These assets and liabilities have previously been measured at fair
value in accordance with existing GAAP, and our accounting for these assets and liabilities was not
impacted by our adoption of Statement No. 157 and Statement No. 159. As of March 31, 2008, we did
not have any assets or liabilities that had fair values determined by Level 2 or Level 3 inputs.

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Fair Value Measurements Using
Quoted Significant
Prices Other Significant
in Active Observable Unobservable
Markets Inputs Inputs Total as of
(Level 1) (Level 2) (Level 3) March 31, 2008
Assets:
Commodity derivative contracts ..... $ 142 $- $- $ 142
Nonqualified benefit plans .............. 132 - - 132
Liabilities:
Commodity derivative contracts ..... 70 - - 70
Nonqualified benefit plans .............. 40 - - 40

10. PRICE RISK MANAGEMENT ACTIVITIES

The net gain (loss) recognized in income representing the amount of hedge ineffectiveness was as follows
(in millions):

2008 2007
Fair value hedges ............................................................ $2 $ (1)
Cash flow hedges ............................................................ (10) 1

The above amounts were included in “cost of sales” in the consolidated statements of income. No
component of the derivative instruments’ gains or losses was excluded from the assessment of hedge
effectiveness. No amounts were recognized in income for hedged firm commitments that no longer
qualify as fair value hedges.

For cash flow hedges, gains and losses reported in “accumulated other comprehensive income” in the
consolidated balance sheets are reclassified into “cost of sales” when the forecasted transactions affect
income. During the three months ended March 31, 2008, we recognized in “accumulated other
comprehensive income” unrealized after-tax losses of $49 million on certain cash flow hedges, primarily
related to forward sales of distillates and associated forward purchases of crude oil, with $47 million of
cumulative after-tax losses on cash flow hedges remaining in “accumulated other comprehensive income”
as of March 31, 2008. We expect that the deferred losses as of March 31, 2008 will be reclassified into
“cost of sales” over the next nine months as a result of hedged transactions that are forecasted to occur.
The amount ultimately realized in income, however, will differ as commodity prices change. For the
three months ended March 31, 2008 and 2007, there were no amounts reclassified from “accumulated
other comprehensive income” into income as a result of the discontinuance of cash flow hedge
accounting.

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11. SEGMENT INFORMATION

Segment information for our two reportable segments, refining and retail, was as follows (in millions):

Refining Retail Corporate Total
Three months ended March 31, 2008:
Operating revenues from external customers... $ 25,430 $ 2,515 $ - $ 27,945
Intersegment revenues ..................................... 1,900 - - 1,900
Operating income (loss) ................................... 568 50 (146) 472

Three months ended March 31, 2007:
Operating revenues from external customers... $ 16,849 $ 1,906 $ - $ 18,755
Intersegment revenues ..................................... 1,309 - - 1,309
Operating income (loss) ................................... 1,776 53 (156) 1,673

Total assets by reportable segment were as follows (in millions):

2008 2007
Refining ......................................................................... $ 36,516 $ 37,703
Retail.............................................................................. 2,104 2,098
Corporate ....................................................................... 2,049 2,921
Total consolidated assets ............................................ $ 40,669 $ 42,722

The entire balance of goodwill as of March 31, 2008 and December 31, 2007 has been included in the
total assets of the refining reportable segment.

12. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost related to our defined benefit plans were as follows for the
three months ended March 31, 2008 and 2007 (in millions):

Other Postretirement
Pension Plans Benefit Plans
2008 2007 2008 2007
Components of net periodic benefit cost:
Service cost ............................................ $ 23 $ 24 $3 $3
Interest cost ............................................ 19 18 7 7
Expected return on plan assets ............... (26) (21) - -
Amortization of:
Prior service cost (credit) .................. 1 1 (2) (3)
Net loss .............................................. - 2 1 2
Net periodic benefit cost ............................. $ 17 $ 24 $9 $9

Our anticipated contributions to our qualified pension plans during 2008 have not changed from amounts
previously disclosed in our consolidated financial statements for the year ended December 31, 2007.

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There were no contributions made during the three months ended March 31, 2008 and 2007. In April
2008, we made a $20 million contribution to our qualified pension plans.

13. COMMITMENTS AND CONTINGENCIES

Accounts Receivable Sales Facility
As of March 31, 2008, we had an accounts receivable sales facility with a group of third-party financial
institutions to sell on a revolving basis up to $1 billion of eligible trade receivables, which matures in
August 2008. As of March 31, 2008 and December 31, 2007, the amount of eligible receivables sold to
the third-party financial institutions was $100 million.

Contingent Earn-Out Agreements
In January 2008 and January 2007, we made previously accrued earn-out payments of $25 million and
$50 million, respectively, related to the acquisition of the St. Charles Refinery. As of March 31, 2008,
aggregate earn-out payments related to the St. Charles Refinery totaled $175 million, which was the
aggregate limit under that agreement. As of March 31, 2008, we have no further commitments with
respect to contingent earn-out agreements.

Insurance Recoveries
During the first quarter of 2007, our McKee Refinery was shut down due to a fire originating in its
propane deasphalting unit, resulting in business interruption losses for which we submitted claims to our
insurance carriers under our insurance policies. We have reached a settlement with the insurance carriers
on our claims, resulting in pre-tax income of approximately $100 million in the first quarter of 2008 that
was recorded as a reduction to “cost of sales.”

Tax Matters
We are subject to extensive tax liabilities, including federal, state, and foreign income taxes and
transactional taxes such as excise, sales/use, payroll, franchise, withholding, and ad valorem taxes. New
tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted
or proposed that could result in increased expenditures for tax liabilities in the future. Many of these
liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax
liabilities as a result of these audits may subject us to interest and penalties.

Effective January 1, 2007, the Government of Aruba (GOA) enacted a turnover tax on revenues from the
sale of goods produced and services rendered in Aruba. The turnover tax, which is 3% for on-island sales
and services and 1% on export sales, is being assessed by the GOA on sales by our Aruba Refinery.
However, due to a previous tax holiday that was granted to our Aruba Refinery by the GOA through
December 31, 2010 as well as other reasons, we believe that exports by our Aruba Refinery should not be
subject to this turnover tax. Accordingly, no expense or liability has been recognized in our consolidated
financial statements with respect to this turnover tax on exports. We have commenced arbitration
proceedings with the Netherlands Arbitration Institute pursuant to which we will seek to enforce our
rights under the tax holiday. We have also filed protests of these assessments through proceedings in
Aruba. In April 2008, we entered into an escrow agreement with the GOA and Caribbean Mercantile
Bank NV (CMB), pursuant to which we agreed to deposit an amount equal to the disputed turnover tax on
exports into an escrow account with CMB, pending resolution of the tax protest proceedings in Aruba.
Under this escrow agreement, we are required to continue to deposit an amount equal to the disputed tax

15


on a monthly basis until the tax dispute is resolved through the Aruba proceedings. Amounts deposited
under this escrow agreement will be reflected as “restricted cash” in our consolidated balance sheet.

Aruba Refinery Fire
On January 25, 2008, our Aruba Refinery was shut down due to a fire in its vacuum unit. We resumed
partial operation of the refinery in mid-February, and we are in the process of completing the repairs and
expect to resume full operations in the second quarter of 2008. We do not believe that this incident will
have a material adverse effect on our results of operations for 2008.

Litigation
MTBE Litigation
As of May 1, 2008, we were named as a defendant in 83 cases alleging liability related to MTBE
contamination in groundwater. The plaintiffs are generally water providers, governmental authorities,
and private water companies alleging that refiners and marketers of MTBE and gasoline containing
MTBE are liable for manufacturing or distributing a defective product. We have been named in these
lawsuits together with many other refining industry companies. We are being sued primarily as a refiner
and marketer of MTBE and gasoline containing MTBE. We do not own or operate gasoline station
facilities in most of the geographic locations in which damage is alleged to have occurred. The lawsuits
generally seek individual, unquantified compensatory and punitive damages, injunctive relief, and
attorneys’ fees.

We, together with several other refining industry defendants, and the plaintiffs have reached an agreement
in principle to settle 59 of the 83 cases, including the Suffolk County Water Authority case, which is
scheduled for trial in September 2008. Under the proposed settlement, we are assigned a percentage of
the aggregate settlement amount, which will require us to make an insignificant cash payment. We will
also commit to participate with other defendants in contingent future treatment of water supply wells
under certain defined circumstances. We anticipate that a portion of our payment will be funded by third
parties. The settlement will not become effective until it is approved by the court, which we expect will
occur sometime in the late second quarter or early third quarter of 2008.

Most of the 24 cases that are not subject to the proposed settlement are pending in federal court and are
consolidated for pre-trial proceedings in the U.S. District Court for the Southern District of New York
(Multi-District Litigation Docket No. 1358, In re: Methyl-Tertiary Butyl Ether Products Liability
Litigation). A 2007 ruling on jurisdiction from the U.S. Court of Appeals for the Second Circuit has
resulted in a remand of two cases to state court (People of the State of New Hampshire and People of the
State of California). Discovery is now open in all cases. We believe that we have strong defenses to all
claims and are vigorously defending the remaining cases.

We have recorded a loss contingency liability with respect to our MTBE litigation portfolio in accordance
with FASB Statement No. 5, “Accounting for Contingencies.” However, due to the inherent uncertainty
of litigation, we believe that it is reasonably possible (as defined in FASB Statement No. 5) that we may
suffer a loss with respect to one or more of the lawsuits in excess of the amount accrued. We believe that
such an outcome in any one of these lawsuits would not have a material adverse effect on our results of
operations or financial position. However, we believe that an adverse result in all or a substantial number
of these cases could have a material effect on our results of operations and financial position. An estimate
of the possible loss or range of loss from an adverse result in all or substantially all of these cases cannot
reasonably be made.

16


Retail Fuel Temperature Litigation
As of May 1, 2008, we were named in 22 consumer class action lawsuits relating to fuel temperature. We
have been named in these lawsuits together with several other defendants in the retail petroleum
marketing business. The complaints, filed in federal courts in several states, allege that because fuel
volume increases with fuel temperature, the defendants have violated state consumer protection laws by
failing to adjust the volume of fuel when the fuel temperature exceeded 60 degrees Fahrenheit. The
complaints seek to certify classes of retail consumers who purchased fuel in various locations. The
complaints seek an order compelling the installation of temperature correction devices as well as
associated monetary relief. In June 2007, the federal lawsuits were consolidated into a multi-district
litigation case in the U.S. District Court for the District of Kansas (Multi-District Litigation Docket
No. 1840, In re: Motor Fuel Temperature Sales Practices Litigation). In February 2008, the court denied
the defendants’ motion to dismiss the complaints. We believe that we have several strong defenses to
these lawsuits and intend to contest them. We have not recorded a loss contingency liability with respect
to this matter, but due to the inherent uncertainty of litigation, we believe that it is reasonably possible (as
defined in FASB Statement No. 5) that we may suffer a loss with respect to one or more of the lawsuits.
An estimate of the possible loss or range of loss from an adverse result in all or substantially all of these
cases cannot reasonably be made.

Rosolowski
Rosolowski v. Clark Refining & Marketing, Inc., et al., Judicial Circuit Court, Cook County, Illinois (Case
No. 95-L 014703). We assumed this class action lawsuit in the Premcor Acquisition. The lawsuit, filed
in 1995, relates in part to a release to the atmosphere of spent catalyst containing low levels of metals
from the now-closed Blue Island, Illinois refinery in 1994. The case was certified as a class action in
2000 with three classes, two of which received nominal or no damages, and one of which received a
sizeable jury verdict. That class consisted of local residents who claimed property damage or loss of use
and enjoyment of their property over a period of several years. In November 2005, the jury returned a
verdict for the plaintiffs of $80.1 million in compensatory damages and $40 million in punitive damages.
However, following our motions for new trial and judgment notwithstanding the verdict (citing, among
other things, misconduct by plaintiffs’ counsel and improper class certification), the trial judge in
November 2006 vacated the jury’s award and decertified the class. Plaintiffs have appealed the court’s
decision to vacate the $120 million judgment and decertify the class. Oral arguments on plaintiffs’ appeal
were heard before the state appeals court on February 20, 2008. We have recorded a loss contingency
liability with respect to this matter in accordance with FASB Statement No. 5. We do not believe that this
matter will have a material effect on our financial position or results of operations.

Other Litigation
We are also a party to additional claims and legal proceedings arising in the ordinary course of business.
We believe that there is only a remote likelihood that future costs related to known contingent liabilities
related to these legal proceedings would have a material adverse impact on our consolidated results of
operations or financial position.

17


14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In conjunction with the acquisition of Premcor Inc. on September 1, 2005, Valero Energy Corporation has
fully and unconditionally guaranteed the following debt of The Premcor Refining Group Inc. (PRG), a
wholly owned subsidiary of Valero Energy Corporation, that was outstanding as of March 31, 2008:
• 6.75% senior notes due February 2011,
• 6.125% senior notes due May 2011,
• 6.75% senior notes due May 2014, and
• 7.5% senior notes due June 2015.

In addition, PRG has fully and unconditionally guaranteed all of the outstanding debt issued by Valero
Energy Corporation.

The following condensed consolidating financial information is provided for Valero and PRG as an
alternative to providing separate financial statements for PRG. The accounts for all companies reflected
herein are presented using the equity method of accounting for investments in subsidiaries.

18


Condensed Consolidating Balance Sheet as of March 31, 2008
(unaudited, in millions)
Valero Other Non-
Energy Guarantor
Corporation PRG Subsidiaries Eliminations Consolidated

ASSETS
Current assets:
Cash and temporary cash investments ............................ $ 794 $ - $ 637 $ - $ 1,431
Restricted cash ................................................................ 23 2 16 - 41
Receivables, net .............................................................. - 106 5,903 - 6,009
Inventories ...................................................................... - 466 4,177 - 4,643
Deferred income taxes .................................................... - - 271 - 271
Prepaid expenses and other............................................. - 7 112 - 119
Total current assets ..................................................... 817 581 11,116 - 12,514

Property, plant and equipment, at cost ................................ - 6,816 19,473 - 26,289
Accumulated depreciation .................................................. - (477) (3,828) - (4,305)
Property, plant and equipment, net ................................. - 6,339 15,645 - 21,984

Intangible assets, net ........................................................... - 1 274 - 275
Goodwill ............................................................................. - 1,816 2,244 - 4,060
Investment in Valero Energy affiliates ............................... 7,136 1,222 (48) (8,310) -
Long-term notes receivable from affiliates ......................... 16,414 - - (16,414) -
Deferred income tax receivable .......................................... 475 - - (475) -
Deferred charges and other assets, net ................................ 389 153 1,294 - 1,836
Total assets.................................................................. $ 25,231 $ 10,112 $ 30,525 $ (25,199) $ 40,669

Current portion of long-term debt
and capital lease obligations ....................................... $ - $ - $ 3 $ - $ 3
Accounts payable............................................................ 97 380 8,158 - 8,635
Accrued expenses ........................................................... 162 45 283 - 490
Taxes other than income taxes ........................................ - 13 521 - 534
Income taxes payable...................................................... 117 84 1 - 202
Deferred income taxes .................................................... 293 - - - 293
Total current liabilities................................................ 669 522 8,966 - 10,157

Long-term debt and capital lease obligations,
less current portion ......................................................... 5,530 902 39 - 6,471
Long-term notes payable to affiliates.................................. - 7,000 9,414 (16,414) -
Deferred income taxes ........................................................ - 1,547 2,936 (475) 4,008
Other long-term liabilities................................................... 800 189 812 - 1,801

Common stock ................................................................ 6 - 2 (2) 6
Additional paid-in capital ............................................... 7,258 75 2,471 (2,546) 7,258
Treasury stock................................................................. (6,574) - - - (6,574)
Retained earnings............................................................ 17,110 (121) 5,936 (5,815) 17,110
Accumulated other comprehensive income (loss)........... 432 (2) (51) 53 432
Total stockholders’ equity........................................... 18,232 (48) 8,358 (8,310) 18,232
Total liabilities and stockholders’ equity .................... $ 25,231 $ 10,112 $ 30,525 $ (25,199) $ 40,669

19


Condensed Consolidating Balance Sheet as of December 31, 2007
(in millions)
Valero Other Non-
Energy Guarantor

ASSETS
Current assets:
Cash and temporary cash investments ............................ $ 1,414 $ - $ 1,050 $ - $ 2,464
Restricted cash................................................................ 23 2 6 - 31
Receivables, net .............................................................. 1 119 7,571 - 7,691
Inventories ...................................................................... - 569 3,615 - 4,184
Deferred income taxes .................................................... - - 247 - 247
Prepaid expenses and other............................................. - 11 164 - 175
Total current assets ..................................................... 1,438 701 12,653 - 14,792

Property, plant and equipment, at cost................................ - 6,681 19,106 - 25,787
Accumulated depreciation .................................................. - (420) (3,658) - (4,078)
Property, plant and equipment, net ................................. - 6,261 15,448 - 21,709

Intangible assets, net........................................................... - 2 288 - 290
Goodwill............................................................................. - 1,816 2,245 - 4,061
Investment in Valero Energy affiliates ............................... 7,080 1,183 73 (8,336) -
Long-term notes receivable from affiliates ......................... 17,321 - - (17,321) -
Deferred charges and other assets, net ................................ 386 165 1,319 - 1,870
Total assets ................................................................. $ 26,225 $ 10,128 $ 32,026 $ (25,657) $ 42,722

Current portion of long-term debt
and capital lease obligations ....................................... $ 7 $ 382 $ 3 $ - $ 392
Accounts payable............................................................ 234 302 9,060 - 9,596
Accrued expenses ........................................................... 79 55 368 - 502
Taxes other than income taxes........................................ - 25 607 - 632
Income taxes payable...................................................... 227 115 157 - 499
Deferred income taxes .................................................... 21 272 - - 293
Total current liabilities................................................ 568 1,151 10,195 - 11,914

Long-term debt and capital lease obligations,
less current portion ......................................................... 5,527 903 40 - 6,470
Long-term notes payable to affiliates.................................. - 7,763 9,558 (17,321) -
Deferred income taxes ........................................................ 852 57 3,112 - 4,021
Other long-term liabilities................................................... 771 181 858 - 1,810

Common stock................................................................ 6 - 2 (2) 6
Additional paid-in capital ............................................... 7,111 75 2,486 (2,561) 7,111
Treasury stock................................................................. (6,097) - - - (6,097)
Retained earnings ........................................................... 16,914 - 5,764 (5,764) 16,914
Accumulated other comprehensive income (loss)........... 573 (2) 11 (9) 573
Total stockholders’ equity .......................................... 18,507 73 8,263 (8,336) 18,507
Total liabilities and stockholders’ equity .................... $ 26,225 $ 10,128 $ 32,026 $ (25,657) $ 42,722

20


Condensed Consolidating Statement of Income for the Three Months Ended March 31, 2008

Valero Other Non-
Energy Guarantor

Operating revenues ............................................................. $ - $ 7,674 $ 27,605 $ (7,334) $ 27,945

Costs and expenses:
Cost of sales.................................................................... - 7,419 25,584 (7,334) 25,669
Refining operating expenses ........................................... - 234 880 - 1,114
Retail selling expenses.................................................... - - 188 - 188
General and administrative expenses .............................. (1) 13 123 - 135
Depreciation and amortization expense .......................... - 78 289 - 367
Total costs and expenses............................................. (1) 7,744 27,064 (7,334) 27,473

Operating income (loss)..................................................... 1 (70) 541 - 472
Equity in earnings of subsidiaries ....................................... 136 39 (121) (54) -
Other income (expense), net ............................................... 292 (8) 192 (456) 20
Incurred........................................................................... (137) (148) (287) 456 (116)
Capitalized ...................................................................... - 4 15 - 19

Income (loss) before income tax expense (benefit)............. 292 (183) 340 (54) 395
Income tax expense (benefit) (1) ........................................ 31 (62) 165 - 134

Net income (loss)................................................................ $ 261 $ (121) $ 175 $ (54) $ 261

(1) The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings of subsidiaries.

21


Condensed Consolidating Statement of Income for the Three Months Ended March 31, 2007

Valero Other Non-
Energy Guarantor

Operating revenues ............................................................. $ - $ 4,872 $ 16,330 $ (2,447) $ 18,755

Costs and expenses:
Cost of sales.................................................................... - 4,281 13,676 (2,447) 15,510
Refining operating expenses ........................................... - 199 735 - 934
Retail selling expenses.................................................... - - 171 - 171
General and administrative expenses .............................. - 3 142 - 145
Depreciation and amortization expense .......................... - 73 249 - 322
Total costs and expenses............................................. - 4,556 14,973 (2,447) 17,082

Operating income................................................................ - 316 1,357 - 1,673
Equity in earnings of subsidiaries ....................................... 927 66 163 (1,156) -
Other income (expense), net ............................................... 357 (32) 189 (509) 5
Incurred........................................................................... (94) (162) (342) 509 (89)
Capitalized ...................................................................... - 1 30 - 31

Income from continuing operations before income tax
expense ........................................................................... 1,190 189 1,397 (1,156) 1,620
Income tax expense (1) ....................................................... 46 90 396 - 532

Income from continuing operations .................................... 1,144 99 1,001 (1,156) 1,088

Income (loss) from discontinued operations, net of
income tax expense............................................................. - 64 (8) - 56

Net income.......................................................................... $ 1,144 $ 163 $ 993 $ (1,156) $ 1,144

(1) The income tax expense reflected in each column does not include any tax effect of the equity in earnings of subsidiaries.

22


Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2008

Valero Other Non-
Energy Guarantor

Net cash provided by operating activities ................................ $ 124 $ 32 $ 472 $ - $ 628

Capital expenditures ............................................................ - (106) (431) - (537)
Deferred turnaround and catalyst costs ................................ - (10) (93) - (103)
Contingent payments in connection with acquisitions ......... - - (25) - (25)
Net intercompany loans ....................................................... (171) - - 171 -
Minor acquisitions and other investing activities, net .......... - - (51) - (51)
Net cash used in investing activities ............................ (171) (116) (600) 171 (716)

Long-term note repayments ................................................. (6) (368) - - (374)
Purchase of common stock for treasury ............................... (518) - - - (518)
employee benefit plans .................................................... 7 - - - 7
Benefit from tax deduction in excess of recognized
stock-based compensation cost ...................................... 8 - - - 8
Common stock dividends..................................................... (64) - - - (64)
Net intercompany borrowings (repayments)........................ - 452 (281) (171) -
Net cash provided by (used in) financing activities ..... (573) 84 (281) (171) (941)

Effect of foreign exchange rate changes on cash ..................... - - (4) - (4)
Net increase (decrease) in cash and temporary cash
investments .......................................................................... (620) - (413) - (1,033)
Cash and temporary cash investments
at beginning of period.......................................................... 1,414 - 1,050 - 2,464
Cash and temporary cash investments at end of period ........... $ 794 $ - $ 637 $ - $ 1,431

23


Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2007

Valero Other Non-
Energy Guarantor

Net cash provided by operating activities ................................ $ 725 $ 209 $ 952 $ - $ 1,886

Capital expenditures ............................................................ - (122) (429) - (551)
Deferred turnaround and catalyst costs ................................ - (14) (115) - (129)
Contingent payments in connection with acquisitions ......... - - (50) - (50)
Investments in subsidiaries .................................................. (73) - - 73 -
Return of investment............................................................ 358 - 3 (361) -
Net intercompany loans ....................................................... (133) - - 133 -
Other investing activities, net .............................................. - 7 - - 7
Net cash provided by (used in) investing activities...... 152 (129) (591) (155) (723)

Long-term note repayments ................................................. - (183) - - (183)
Purchase of common stock for treasury ............................... (904) - - - (904)
employee benefit plans .................................................... 37 - - - 37
Benefit from tax deduction in excess of recognized
stock-based compensation cost ...................................... 63 - - - 63
Common stock dividends..................................................... (73) - - - (73)
Dividends to parent.............................................................. - (3) (358) 361 -
Capital contributions from parent ........................................ - - 73 (73) -
Net intercompany borrowings (repayments)........................ - 106 27 (133) -
Net cash used in financing activities ............................ (877) (80) (258) 155 (1,060)

Effect of foreign exchange rate changes on cash ..................... - - 3 - 3
Net increase in cash and temporary cash investments ............. - - 106 - 106
Cash and temporary cash investments
at beginning of period.......................................................... 712 - 878 - 1,590
Cash and temporary cash investments at end of period ........... $ 712 $ - $ 984 $ - $ 1,696

24


15. SUBSEQUENT EVENT

On May 8, 2008, we entered into an agreement to sell our refinery in Krotz Springs, Louisiana to Alon
USA Energy Inc. The sales price is $333 million, plus an amount equal to net working capital at the
refinery as of the closing date of the sale, which is expected to occur early in the third quarter of 2008.
The sales agreement also includes an earn-out provision under which we will receive additional proceeds
if certain average refining margins during the next three years exceed specified levels. Net proceeds from
the sale exceed the carrying amount of the net assets being sold. The sale is subject to the receipt of
required regulatory approvals.

25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Form 10-Q, including without limitation our discussion below under the heading “Results of
Operations - Outlook,” includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our
forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,”
“project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “should,”
“may,” and similar expressions.
These forward-looking statements include, among other things, statements regarding:

• future refining margins, including gasoline and distillate margins;
• future retail margins, including gasoline, diesel, home heating oil, and convenience store
merchandise margins;
• expectations regarding feedstock costs, including crude oil differentials, and operating expenses;
• anticipated levels of crude oil and refined product inventories;
• our anticipated level of capital investments, including deferred refinery turnaround and catalyst
costs and capital expenditures for environmental and other purposes, and the effect of those
capital investments on our results of operations;
• anticipated trends in the supply of and demand for crude oil and other feedstocks and refined
products in the United States, Canada, and elsewhere;
• expectations regarding environmental, tax, and other regulatory initiatives; and
• the effect of general economic and other conditions on refining and retail industry fundamentals.

We based our forward-looking statements on our current expectations, estimates, and projections about
ourselves and our industry. We caution that these statements are not guarantees of future performance
and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of
these forward-looking statements on assumptions about future events that may prove to be inaccurate.
Accordingly, our actual results may differ materially from the future performance that we have expressed
or forecast in the forward-looking statements. Differences between actual results and any future
performance suggested in these forward-looking statements could result from a variety of factors,
including the following:

• acts of terrorism aimed at either our facilities or other facilities that could impair our ability to
produce or transport refined products or receive feedstocks;
• political and economic conditions in nations that consume refined products, including the United
States, and in crude oil producing regions, including the Middle East and South America;
• the domestic and foreign supplies of refined products such as gasoline, diesel fuel, jet fuel, home
heating oil, and petrochemicals;
• the domestic and foreign supplies of crude oil and other feedstocks;
• the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree
on and to maintain crude oil price and production controls;
• the level of consumer demand, including seasonal fluctuations;
• refinery overcapacity or undercapacity;
• the actions taken by competitors, including both pricing and the expansion and retirement of
refining capacity in response to market conditions;
• environmental, tax, and other regulations at the municipal, state, and federal levels and in foreign
countries;

26

• the level of foreign imports of refined products;
• accidents or other unscheduled shutdowns affecting our refineries, machinery, pipelines, or
equipment, or those of our suppliers or customers;
• changes in the cost or availability of transportation for feedstocks and refined products;
• the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;
• delay of, cancellation of, or failure to implement planned capital projects and realize the various
assumptions and benefits projected for such projects or cost overruns in constructing such
planned capital projects;
• earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the
price or availability of natural gas, crude oil and other feedstocks, and refined products;
• rulings, judgments, or settlements in litigation or other legal or regulatory matters, including
unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
• legislative or regulatory action, including the introduction or enactment of federal, state,
municipal, or foreign legislation or rulemakings, which may adversely affect our business or
operations;
• changes in the credit ratings assigned to our debt securities and trade credit;
• changes in currency exchange rates, including the value of the Canadian dollar relative to the U.S.
dollar; and
• overall economic conditions.

Any one of these factors, or a combination of these factors, could materially affect our future results of
operations and whether any forward-looking statements ultimately prove to be accurate. Our forward-
looking statements are not guarantees of future performance, and actual results and future performance
may differ materially from those suggested in any forward-looking statements. We do not intend to
update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly
release the results of any revisions to any such forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

27

OVERVIEW

In this overview, we describe some of the primary factors that we believe affected our operations in the
first quarter of 2008. Our profitability is substantially determined by the spread between the price of
refined products and the price of crude oil, referred to as the “refined product margin.” The weakening of
industry fundamentals for refined products that we experienced in the fourth quarter of 2007 continued
during the first quarter of 2008. Gasoline margins declined in the first quarter of 2008 compared to the
prior year first quarter. The decline was primarily due to increasing costs of crude oil and other
feedstocks combined with a decrease in gasoline demand. The increasing costs of crude oil and other
feedstocks also negatively affected margins on certain secondary products during the first quarter of 2008,
such as asphalt, fuel oils, petroleum coke, and petrochemical feedstocks. However, diesel margins in the
first quarter of 2008 were favorable compared to the first quarter of 2007 primarily due to tight supplies
combined with continued strong global demand.

Because approximately 60% of our total crude oil throughput represents sour crude oil and acidic sweet
crude oil feedstocks that are purchased at prices less than sweet crude oil, our profitability is also
significantly affected by the spread between sweet crude oil and sour crude oil prices, referred to as the
“sour crude oil differential.” First quarter 2008 sour crude oil differentials remained wide and improved
compared to the 2007 first quarter differentials.

On January 25, 2008, our Aruba Refinery was shut down due to a fire in its vacuum unit. We resumed
partial operation of the refinery in mid-February, and we are in the process of completing the repairs and
expect to resume full operations in the second quarter of 2008.

We reported income from continuing operations of $261 million, or $0.48 per share, for the first quarter
of 2008, compared to $1.1 billion, or $1.77 per share, for the first quarter of 2007. The first quarter 2008
results included approximately $100 million of pre-tax income, or $0.12 per share, resulting from a
settlement of our business interruption claims related to the fire at our McKee Refinery in the first quarter
of 2007. During the first quarter of 2008, we purchased $518 million of our common stock under our
board-authorized programs and repaid $367 million of callable debt that was due in 2013.

28

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